Embrace falling home affordability, says NZIER

Embrace falling home affordability, says NZIER

By
Pattrick Smellie

July 18 (BusinessDesk) - Despair over the
inability to afford a house is misplaced and should be
embraced as an opportunity to invest in more wealth-creating
activity, says the principal economist at the New Zealand
Institute of Economic Research, Shamubeel Eaqub.

"The
fixation with home ownership is causing social inequity and
despair," said Eaqub, releasing a new study on New Zealand's
"crippling" home affordability problem.

“People fear
being locked out of a traditional route to financial
security, as almost 70 percent of New Zealand’s household
net wealth is stored in housing. At today’s prices, an
average Auckland home will take 50 years to pay off on an
average Auckland salary. In the early 1990s, the average
Auckland home took 30 years to pay off.”

"Home
ownership rates are at their lowest since 1951," said Eaqub,
"but rather than obsessing about that, it is a trend New
Zealanders should embrace.“Economies prosper when
people invest in business, not just housing. We need to
create level-playing fields for different types of
investment, and parity between renting and owning, to
support a much needed cultural change around
housing.”

New Zealand had one of the least
"renter-friendly" regimes in the world, reform is needed to
stop banks favouring home mortgages over other forms of
lending, and the tax system contains advantages for real
estate that don't exist for other classes of
investment.

Planning rules also need to improve the supply
of land and housing supply, which is currently slow to
respond to signals that more housing is required to meet
population growth and household composition
changes.

"There is no easy or quick fix to New Zealand's
over-valued housing market," the report, titled "The Home
Affordability Challenge", concludes. "Not one single change
will be enough. The solutions need to be a complementary set
- it's like taking a Swiss Army knife to a knotty
problem."

The report identifies a "culture of home
ownership and housing investment" as being one of the
factors causing the affordability problem.

However,
over-exposure to property values carries risks for
financial, economic and social stability in the event that
house prices drop dramatically, with some measures showing
New Zealand houses are over-valued on a globally comparable
basis by about 26 percent. Auckland's siting on a narrow
isthmus tends to push land prices higher because it is
physically constrained, making efficient investment in
roading and public transport difficult, the report
suggests.

It also says "Australia and New Zealand are some
of the most ‘restrictive’ rental jurisdictions from the
viewpoint of the renter. Lease terms are short, tenants can
be asked to move with short notice, leases can be terminated
on almost any condition as long as notice is given, and
personal customisation is often difficult."

Changes to
prevailing lease conditions would make renting less
unattractive, and the report notes that rents have remained
stable while the cost of buying a home has increased in
recent years.

Fears that an influx of foreign investors is
boosting house prices are "unfounded," the report
says.

"The most commonly described foreign investor is
someone who comes with a wad of cash or has borrowed large
chunks of money offshore to buy a house in a posh suburb and
leave it empty. The data simply do not support these
anecdotal
observations."

The Wellington-based BusinessDesk team led by former Bloomberg Asian top editor Jonathan Underhill and Qantas Award-winning journalist and commentator Pattrick Smellie provides a daily news feed for a serious business audience.

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